The following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.
Remember a few short years ago when millions of people were losing their homes to foreclosure?
Some of them were hit by unfortunate circumstances – others simply walked away when the value of the property fell below the amount of the mortgage that they owed on it. But, it’s likely that most of them lost their homes because they made one or more major mistakes at the time they bought the property.
If you are in the market to buy a house, there are steps that you can take now to avoid falling into a similar trap. Here are six first time homebuyer mistakes to avoid like the plague.
1. Over-Buying
This is probably the single biggest reason why people get into trouble with homeownership. Simply put, they buy more house than they can comfortably afford.
They do this by buying at or above the highest house price level that they are qualified for. They may be pre-qualified to buy a home for $300,000, but end up buying one for $320,000.
That actually understates the problem. Whatever property value they are qualified to buy, they always have the option to buy beneath it. For example, they can easily buy a house for $240,000 and that will leave them plenty of room in their budget for non-housing expenses, including saving money.
But by buying at or above their highest qualification level, they essentially doom themselves to a life of always needing to stretch to meet their monthly budget. And should an emergency come along, they will be completely vulnerable.
Moral of the story: when buying a house, always leave yourself plenty of financial margin for error. You will probably need it.
2. Buying a House Before You’re Ready
A lot of people buy a house because of peer pressure, and not for legitimate need. The pressure often comes about from parents and from other family and friends who are certain that it is “the right thing” for everyone to become a homeowner, and to do it as soon as possible. You may even be persuaded to buy a home because of the tax benefits that it offers.
But none of these are legitimate reasons to take on a financial obligation as great as owning a house. Buy because you are in a position in your life – such as marriage or the arrival of children – that make it desirable. Or buy because it’s less expensive than renting a similar property in your area.
There are times in your life where owning a home can be the absolute wrong course of action.
Unfortunately, it isn’t a decision that is easily reversed. Be sure that you are ready for the commitment of both time and money that owning a home requires. If you’re not, relax and take your time.
3. Not Doing a Home Inspection
There are at least two reasons why homebuyers pass on having a home inspection done on the property they’re buying:
- They don’t want to spend the $200 or $300 that it will cost, or
- They are so in love with the property that they don’t want to learn any bad news that might cause them to not buy it.
Neither are legitimate reasons to not have a home inspection. That inspection will be your last opportunity to back out of what could very well be a very poor deal. Pay the extra money, or have a family member pay for it, but get a home inspection done, and pay close attention to what it contains.
Not having it done can cost you thousands of dollars later on – money that you may not have.
4. Ignoring the Possibility of Living on a Single Paycheck
This gets back to over-buying, but it’s more specific. If you are too tightly stretched on your house payment, there will be no room in your budget if one parent wants to stay on with a new baby, or even if one wants to quit his or her job to start a new business.
In an ideal world you will qualify for the house payment based primarily on a single income. While this is not always possible, doing so gives you the flexibility that may be absolutely necessary at a later date. At a minimum, try to get as close to qualifying on a single income as you can, which may allow you to make other arrangements in the event that it becomes necessary.
5. Buying a Bunch of New Stuff for the New House
Many homebuyers feel the absolute necessity to fill the new home with all kinds of new stuff. This can include new furniture, new window treatments, and even a brand-new car. It’s also not uncommon for new homebuyers to pull out perfectly good carpet and to replace it with new carpet or with wood floors.
That kind of activity costs money at a time when you’re probably already stretched thin. And you certainly don’t need to be running up credit card balances to make it happen.
After you buy your home, you should plan on being extremely conservative spending your money. It would be far better to put any extra money into savings, that way you will have a cushion in the event of unforeseen circumstances. After that, you can begin to make gradual improvements to the property, as additional funds become available.
6. Closing Broke
Next to over buying, this is likely the second-biggest mistake that first-time homebuyers make. Owning a home cost money, generally more than renting does. After all, if the heater melts down and needs to be replaced, you won’t be able pick up the phone and call the landlord to have it taken care of.
Mortgage lenders typically require that you have “cash reserves” – liquid savings equal to somewhere between two to six months of your house payment. Many homebuyers will show this amount only for qualification purposes, then the cash quickly disappears.
Owning a home requires that you maintain a certain amount of liquidity, and that needs to start from day one of your ownership. It sets a positive pattern, if you have money available right after the closing. Take this seriously, because trying to save up money when you’re broke and taking care of a home is not an easy task.
The standard advice from financial planners is to have somewhere between three and six months of living expenses in an emergency fund. The advice works extremely well for first-time homebuyers, even if lenders require far less.
Follow these six steps, and your life is a homeowner should be a relatively stress-free experience.
How about you all? What mistakes did you make when you first bought a house? Any of the ones above?
Share your experiences by commenting below!
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